FedNow’s Success Hinges on Getting Enough Banks to Connect — and Use It

As the world becomes increasingly digital, the idea of instant gratification has become the norm. From streaming movies to ordering groceries, consumers expect everything to be available at their fingertips 24/7. The payments industry is no exception to this trend, with instant payment solutions poised to revolutionize how Americans transfer money. 

The Federal Reserve’s FedNow system is set to launch soon, offering instant payments to users across the United States.  

In an interview with PYMNTS, Miriam Sheril, head of product – US at Form3, noted that instant payments has been available in the States since the 2017 rollout of The Clearing House’s RTP network, but thus far, only about 300 banks have signed on. FedNow will debut in July — offering another instant “rail” for faster payments. 

Sheril maintained that FedNow’s success hinges on its adoption by banks — thousands of them. 

“To drive a network, you need ubiquity, and it’s hard to achieve when there’s a chicken and egg situation,” she said. In that case, she noted, banks may be holding off to see whether new use cases and consumer demand materialize before signing on; the consumer demand and use cases may be slow to materialize unless they see that their banks (on both the senders’ and receivers’ sides of the equation) have the functionality in place. 

As she remarked to PYMNTS, Form3, a vendor offering an agnostic solution that works for RTP and FedNow, is poised to help banks navigate the new landscape. As faster payments evolve, the initial use cases may crystallize around lower-risk, lower volume (and lower dollar-value) transactions.

In terms of a logical roadmap and the emergence of a “network effect,” Sheril contended that banks would join the network as receive-only first, and once all 9,000 to 10,000 U.S. banks are receiving these payments, larger banks and businesses will move to embrace new use cases. 

Eventually, payroll will be a significant potential use case for faster payments. Real estate companies and hedge funds are also pushing for faster payments to close deals on weekends and nights.

Not Everything Must Be Instant

There will, of course, always be room for payments to travel across traditional rails, depending on the transaction, with no need to be settled in seconds. Some businesses rely on the float, or the interest earned during the time it takes for payments to clear, so instant payments may not be preferable. 

Sheril said, “There’s money that someone’s making off the money that hasn’t moved yet, and that’s going be weighed against consumer business demand to get their money instantly, and [the latter] might not always win. Sometimes it’s going to be better to say, ‘I don’t want that money to move instantly. My whole business model is built around that money not moving instantly.’” The reliability and stability of traditional payment conduits like ACH wire cannot be ignored, she said.

Instant payment schemes have become increasingly popular worldwide, with many countries implementing their own versions of the technology. However, the technical aspects involved in making payments from one person to another in 20 seconds or less can be complicated. Domestic and cross-border payments have different times and hours, which can make it difficult to ensure that payments are processed quickly and efficiently. 

Interoperability, of course, will be a significant tailwind towards more mainstream adoption of instant payments — especially with cross-border payments. Sheril maintained that intelligent routing could solve issues related to interoperability through application programming interfaces (APIs) that initiate payments and automatically route them to the appropriate payment rail. 

She said, “If you use Form3, as an example, use our API, you initiate the payment. It doesn’t matter if the receiver bank is on RTP or FedNow. Intelligent routing from any company that’s offering this type of feature will do that check for you. … It’s really about letting banks … get their payment through based on certain business preferences.”

The FedNow pilot program, which Sheril deemed a success, was a collaborative effort involving over 120 participants across banks, service providers and vendors. 

“The collaboration and input was huge so that helped inform a ton of the work,” she noted, pointing to the many FIs that have already been operating on and have experience with the RTP network. She also predicted that some “tinkering and quick fixes” would be involved in going live and testing the interoperability over the near and longer term.

“FedNow will catalyze the industry,” she said, adding that “as some banks join, others will start their journey — and it’s an opportune time do so. There’ll be lucrative opportunities for people to build and for businesses to grow.”